Commtouch Software: CEO Mantel Has Regained His Touch

| About: CYREN Ltd. (CYRN)

Much has been written about Commtouch Software Ltd. (CTCH), one of those companies that left its mark on the Israeli corner of Wall Street at a time when they didn’t do anything on Main Street. I refer here to a large group of companies, among them Orckit Communications (OTCPK:ORCT), Gilat Satellite Networks Ltd. (NASDAQ:GILT), Pharmos Corp. (OTCPK:PARS), and Attunity (NASDAQ:ATTU). They animated the imagination of Israeli investors and soared to astronomical values when in fact they were worth very little.

I have been following Commtouch for some time and have had occasion to both praise and excoriate its management. However, it appears to me that recently, Commtouch, like a few other companies that resemble the sphinx, is now rising from the ashes, and if all goes according to plan, it will do so in a big way.

Among Commtouch's management, the only familiar name is CEO Gideon Mantel. For better or worse, Mantel has managed, from the perspective of investors, to merge himself with the company. When people get mad at Commtouch, they get mad at Mantel, and when Commtouch succeeds, it’s Mantel’s success. I don’t say this in a negative way. If what I predict actually happens, Mantel, thanks to his tenacity and management skills, will be remembered in Israeli company history as one of the most successful managers ever.

Commtouch has always been interesting since it focuses on a number of extremely interesting fields, most notably spam and everything related to web-based email use. Users are slowly beginning to understand that spam is the number one enemy, “the network pest”, and Commtouch is synonymous with solutions to this nuisance. The difference between Commtouch before 2003 and after is that, over the past two years, the company has shown impressive progress on Main Street, in the real business world. But, as I see it, the most interesting thing about Commtouch is that the security industry has reached a stage where it needs the company’s products in order to promote sales. A long road still lies ahead for Commtouch, but Mantel, the co-founder and the man who has led the company since he founded it together with Amir Lev and Nahum Sharfman -- both of whom are still on the board -- deserves credit for having survived the crisis both on Main Street and Wall Street.

Mantel learned from his tough experience and is now leading Commtouch in the right direction. I believe if he has managed to come this far, he is mature enough to lead the company forward. The determining factor is a manager’s ability to understand what has happened and implement the lessons he learned in a new business model. The security market is developing along the same track as all the other sectors in the economy, under the influence of the IT revolution. That is to say, the market is organized in such a manner that the customer faces several large companies that offer him a package of products and services from A to Z. What’s important for Commtouch is that the security market now realizes that products like the ones it makes are not just part of the package that the consumer will ask for, but much more - they make the whole package more attractive.

Who are Commtouch’s competitors? Financial websites identify them, among others, as McAfee Inc. (MFE), Symantec Corp. (NASDAQ:SYMC), and the Japanese company Trend Micro Inc. (TMIC). To say these are Commtouch’s competitors is like saying that Formula Systems (NASDAQ:FORTY) is a competitor of Oracle Corp (NASDAQ:ORCL). All these companies are giants competing for the lead in the security field and they all offer customers full network protection. The companies differ over the concept of security and they are all having an increasing problem with email and spam, a field in which Commtouch has developed unique expertise. Put differently, Commtouch’s products are increasingly becoming an essential part of this sector.

Commtouch managed to brand itself in the spam and messaging field, even before it showed serious business results. More and more enterprises are beginning to take an interest in its business model. The solution it has developed checks and analyses 300 million messages a day. In other words, Commtouch has become a global source of information on spam. It won’t make any money from this, but it will build a reputation. The decision to set up a system like this was, in my view, a brilliant marketing move. Spam, viruses, and all the other kinds of malicious content that troublemakers send to people and institutions represent a growing problem for which there is currently no real solution. The more security solutions there are, the more sophisticated the spammers become. I presume that if the big companies from Microsoft to Oracle were capable of providing full protection from spam as part of the package they offer customers, they would do so. Commtouch is one of the few companies that specializes in spam, and it has a small group of people who, in terms of their knowledge in the field, are among the best in the world.

All this cost the company money and time -- indeed, it almost put it out of business -- but it now appears that it was worthwhile. What do I mean when I say there are clear signs that this company is showing signs of recovery and may even be on the verge of breakthrough? After all, with all due respect to a strong increase in sales and move to profitability, the breakthrough I am talking about is not on a scale that will impress investors worldwide. With $10 million in the bank and such impressive results, Gideon Mantel can pat himself on the back, but it is still a long way back to the $1 billion market cap that Commtouch had six years ago when it still hadn’t done anything.

All I'll say for now is that Mantel has reached the Yellow Brick Road, and the question is whether he can lead the company to a happy ending. My bet is that he can.

Commtouch has been steadily making more OEM agreements; it had 50 such agreements at the end of Q3. I estimate that it will end 2006 with sales of over $8 million. Its market cap, $61 million, is high in relation to academic calculations of value, but very low if it really is on the road to success.

So is it worth revisiting this stock? Yes, but only after consultation and examination. This is a company that has survived a tough crisis, that is growing in a rapidly expanding niche, and is accumulating know-how and experience. My guess is that within a couple of years it will be bought for a lot of money.

CTCH 1-year chart:

Published originally by Globes [online], Israel business news - © Copyright of Globes Publisher Itonut (1983) Ltd. 2006.
Republished on Seeking Alpha with full permission.